Mainframe-related sales comprised 78% of Compuware's third-quarter product sales, while distributed systems, which include Web development licenses, made up 22 percent.

Compuware's grand plan is to bring non-mainframe software and maintenance sales to about two-thirds of revenues in the next three to five years, cutting its dependence on mainframes and its marginally profitable services business.

Web-based systems become increasingly complex as they add more software and functions. That's a good opportunity for Compuware, which has software and services that help develop, test, debug and monitor software and systems like mainframe computers.

IDC, a market research firm, pegs the Web services market in the multi-billion-dollar range, and it expects companies to adopt Web-based systems in earnest as early as 2003.

Compuware sees this transition from mainframes and services to distributed systems as a $600-million sales opportunity over the long term.

"The fastest growing part of the business and the greatest opportunity is their distributed systems side," says John Rizzuto, analyst at Credit Suisse First Boston, who rates the stock Buy (Rizzuto says he doesn't own the stock, nor has CSFB done investment banking for Compuware).

Basu Mullick, manager of the Neuberger Berman Partners Fund, which has 1% of its $3 billion under management in Compuware stock, sees Compuware's distributed systems sales growing at 30 percent a year over the long run.

The economic recovery should help Compuware, too. Gartner expects corporate spending on information technology to grow by 12% this year and next.

When it picks up again, Compuware's software license sales should shine, says Vincent Muscolino, portfolio manager at the DLB Technology Fund, which has 2.1% of its assets in Compuware.

Also, margins on software are considerably higher than on services, says Muscolino.

In the third quarter, Compuware's license sales and maintenance fees on software had 93% and 91% gross margins, respectively; services had a mere 0.7% operating margin.

Software licenses represented one-quarter of Compuware's $2 billion in sales for the fiscal year ended March 31, 2001, while maintenance and service fees comprised 22% and 53% of sales, respectively.

The move away from mainframes and services is a big one for Compuware, but it already has taken some bold steps in that direction.

Compuware launched its OptimalJ JAVA development tool late last year, as well as other products and services for Microsoft's .NET platform, IBM's DB2 database and Oracle's 9i suite of business software.

To bolster its software business, Compuware's plans to use its 25,000 mostly mainframe customers as a base for pitching its distributed systems and Web-related software and services.

Eventually, Compuware sees software and maintenance outpacing its services business, which made up 50% of revenues in its third quarter; it expects to cut services to about one-third of sales.

Muscolino thinks it will take three to five years to make the transition.

But Compuware has time on its side, since "mainframes aren't dead," says Wiley Reed, analyst at Westcore Funds, whose Westcore Midco Growth Fund has 1.5% of its assets in Compuware stock.

Unfortunately, it was no April Fool's joke on Monday when Compuware shares slipped 5% to 12.25, after the company announced an unspecified fourth-quarter charge to restructure its services, including some office closings and job cuts. On Tuesday, the stock fell an additional 9% to 11.11.

(Compuware had bulked up its professional services business to 54% of total fiscal 2001 sales after it acquired services companies like staffing firm Data Processing Resources.)

The restructuring announcement has been expected since Compuware released third-quarter results. It will help shrink the company's service business and consolidate its offices in a new headquarters in Detroit.

Clearly Compuware took a wrong turn in trying to buy its way into the services business. But some say the company is now doing what it must.

"They're cutting costs, reorganizing. It's a positive in the long term," says Bob Straus, assistant portfolio manager of the Icon Information and Technology Fund, which has 3.2% of its $325 million under management in Compuware stock.

Rizzuto, who doesn't foresee further restructurings, expects as many as 2,000 of the 7,000 employees in services to be cut and several field offices to close when the plan is unveiled on May 7, along with Compuware's fourth-quarter results.

Shares of Compuware are off 23% from a 52-week high of 14.50 reached in August, but are up 47% from a 52-week low of 7.46, hit in October. They're still about 73% below the all-time high of 40 in 1999.

Compuware shares trade at 22 times the 50 cents expected for this fiscal year, and at 17 times the 62 cents analysts project it will earn in fiscal 2003, according to Thomson Financial/First Call.

Compuware's forward P/E is below its median price-to-earnings multiple of 23.4 times forward results for the past five years, according to Thomson Financial/Baseline.

The company sports a $4.1-billion market capitalization, has a debt-free balance sheet and $277 million in cash.

"Compuware is dirt cheap," says Mullick. "With a price-to-sales [ratio] of less than two times, you are essentially getting the services business for free."

To be sure, Compuware needs to build up its Web-based software and other related businesses as mainframe sales wane -- in the teeth of heavyweight competitors like IBM and more nimble players like Quest Software.

But as IT spending gets ready to turn up again, Compuware is positioning itself to be where its customers are going -- and that should be good for its shareholders, too.

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